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Blackstone’s Dell Bid Sets Stage for Bidding War

Offers from Blackstone and Icahn rival the bid from Michael Dell and Silver Lake.

Blackstone Group LP’s preliminary bid to take over Dell Inc. is setting the stage for a rare event: a bidding war between private-equity firms.

Blackstone, the world’s biggest buyout firm, and activist investor Carl Icahn made separate offers last week that rival a $24.4 billion bid for the computer maker by Dell founder Michael Dell and Silver Lake Management LLC, according to a statement today from Dell. The shares rose 3.2 percent to $14.59 at 9:31 a.m. in New York, 6.9 percent above the Silver Lake offer.

While competition for buyout targets is often vigorous in the early stages of auctions, private-equity firms, which buy companies in expectation they can sell them later at a profit, are usually reluctant to make competing bids once a deal has been agreed. Go-shop periods, during which the buyout target can solicit competing offers after the initial agreement, too often are cosmetic affairs that give bidders little time to mount a challenge, said Erik Gordon, a business and law professor at the Stephen M. Ross School of Business at the University of Michigan in Ann Arbor.

“The first bidder arranges it that way to protect its bid,” Gordon said in an e-mail. “The go-shop usually is a go-through-the-motions play.”

A civil antitrust lawsuit filed in federal court alleges that from 2003 to 2007, peak years for buyouts, prominent private-equity firm conspired to keep prices low in 19 jumbo-sized leveraged buyouts and eight other deals, including Freescale Semiconductor Ltd., which a Blackstone-led group acquired, hospital operator HCA Holdings Inc. and media company Clear Channel Communications Inc.

They did so by partnering up in “clubs” instead of competing for deals, and by “standing down” whenever a club bid was near to being signed, the lawsuit alleges. The evidence in the suit includes an e-mail that Blackstone President Tony James sent to KKR co-founder George Roberts after KKR made a counter-bid for Freescale.

“We would much rather work with the guys than against you,” the complaint said James wrote. “Together we can be unstoppable but in opposition we can cost each other a lot of money.” According to the complaint, Roberts replied: “Agreed.”

Blackstone, Silver Lake, KKR, Apollo Global Management LLC, TPG Capital and other major firms are defendants. Their lawyers have argued the transactions represented legitimate business practices, and there was no pattern of winning and losing bids that would indicate collusion.

Go Shop

Earlier this month a judge narrowed the basis on which the case could proceed, while rejecting a defense request to throw it out.

Dell’s 45-day go-shop, which ended March 22, was beefed up to prevent the perception of a conflict of interest for Chief Executive Officer Michael Dell. Deals where the CEO is part of the buyers’ group are often the subject of shareholder scrutiny because management stands to benefit from a low purchase price.

Dell hired Evercore Partners Inc. to advise a special committee of the board and to run the go-shop period. Michael Dell and Silver Lake agreed to a number of restrictions in an effort to create a deal that would withstand shareholder scrutiny, people familiar with the matter said last month.

One restriction on Michael Dell, 48, and Silver Lake is that they can only make one more bid, the people said. So if they move to top Blackstone or Icahn once, they are unable to make a second offer. The breakup fee of $180 million -- which Blackstone or Icahn would have to pay if they block the deal -- is half of the typical fee for a deal of this size, these people said.

Michael Dell is willing to work with third parties on the alternative plans, the company said.

Blackstone has teamed with Francisco Partners, a San Francisco-based technology-oriented buyout shop co-founded in 1999 by former TPG Capital partner David Stanton and Dipanjan Deb, and venture firm Insight Venture Partners. New York-based Insight Venture, started in 1995 by Jeff Horing and Jerry Murdock, has raised more than $5 billion to invest in software, Internet, data and technology services businesses.

Icahn’s Offer

The group is bidding more than $14.25 a share, the computer maker said in today’s statement. Blackstone is proposing a leveraged recapitalization transaction, in which investors could choose to get either all cash or equity, subject to a cap, if they want to stay invested in Dell. The shares would continue to be publicly traded.

Icahn is offering shareholders the option to roll over their stakes or receive $15 a share in cash, with the amount of cash to be used limited to $15.65 billion. The offer assumes that Southeastern Asset Management Inc. and T. Rowe Price Group Inc., among the largest Dell investors after Michael Dell, would contribute their stakes and won’t receive a cash payment. If the cash portion is fully utilized, it would result in 1.04 billion shares, or 58.1 percent of current shares outstanding, being acquired. If fewer shareholders decide to sell, the cash not needed would be distributed as a special dividend.

Blackstone was involved in two other bidding wars in recent years. In 2006, a group led by Blackstone was hammering out details of a final offer for Freescale when KKR lodged a tentative bid that was higher. The Blackstone group matched that offer and bought the company for $17.6 billion.

Last year Blackstone teamed up with chemicals maker Innospec Inc. to try to trump an offer for chemicals producer TPC Group by private-equity firms First Reserve Corp. and SK Capital Partners. First Reserve and SK eventually prevailed.

Bidding wars among firms are unusual because most deal agreements, reached after months of due diligence by buyers, are priced fairly and fully, said one private-equity executive, who asked not to be named because the topic is sensitive for firms and investors. The fact that Dell attracted competing bids shows the offer by Silver Lake and Michel Dell were perceived as too low, he said.

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